What SME owners need to know for successful succession planning

We look into factors you need to consider when passing your business to your successor.

Succession planning is as integral to any organisation as a business plan, and requires a clear vision of your business’ future. At its core, a good succession plan puts in place the state of the business when it’s time for you to hand over the keys, whether it's to your family or to other members of staff. Sometimes ownership transition can come suddenly or unexpectedly too, at which point, a succession plan is an essential way of making sure the business can continue to operate as normal.

In writing up an effective succession plan, there's a lot to be considered, and it can be a surprisingly overlooked element of any business. In determining what will factor into your own SME's succession plan, we'll discuss what SME owners should know about the matter, including its importance and significance, the options that are open to you, and how to go about the process in an efficient manner.

Succession planning: Why is it important?

Consider all the hard work you and others have put into your business, whether it was in periods of boom or bust. A failure to properly consider what happens to the business in your absence could result in that effort being wasted. A large number of SMEs don’t survive into a second or third generation because they don’t plan for succession, while those that do plan ahead have a higher rate of survival by putting this process in place. Therefore, the need for long-term succession planning in advance of the retirement or exit of owners is essential.

Say for instance, that you're looking to sell your business, but don't have a succession plan in place for when that time comes: rather than having a buyer lined up, you make a hasty sale out of desperation. Not only can this lead to a loss of control over the company's future, but it might also lead to premises closing, location moves or even redundancies.

Another scenario: perhaps you want to transition the business to a member of your family. They don't have the essential experience or business knowledge, but you continue with the decision regardless. Without the appropriate amount of transitioning or necessary training, the business could be at risk. By preparing your succession plan in advance, and highlighting the development areas required for your successor, you can ensure that these are achieved in good time for you to hand over the business.

Look to your business plan when informing your succession plan, as the two are closely linked. Since your business plan depends on the right skills in the right place, and the skills for the roles you will need to achieve business aims in the long term, a linked business/succession plan decreases the risk if a senior employee leaves.

The Process of Succession Planning

Identify the successor

Who is going to take your place when you're gone? It could be an existing senior member of staff that has shown their skill and experience over the years, and are willing to go above and beyond for the business. Or, it could be a member of the family you're planning to train up and guide before handing over the reins.

Ideally, you'll be looking for someone who is hard-working, honest, patient, strategic and capable of guiding both the business and others to success. Ensure they're someone you get along with, as you'll be working with them a lot during the transition period. Potentially you may even work closely with them after you leave your current position if you return in a consulting capacity or as a board member. If you don't have anyone you feel is suitable, then you'll have to look at recruiting somebody else. It might be a difficult one to get right, but it's an essential step, so it's worth finding a recruiter who can introduce you to people who might be a proper fit.

Broker the deal

Once you've found a suitable successor, the next step is to begin discussions as to what the business will be like with them at the top. However, it's important to see how they manage for a period of time (usually 12 months), so don't rush into these discussions as soon as they've started.

When the time comes to discuss things with them, think about whether they're buying the business from you, including whether they have the money to buy you out, or whether you'll be keeping some financial interest in the business.

Assuming, for example, it's a key member of your staff who's been with your business for some time and has shown that they’re skilled at the job and are interested in buying the business for an agreed sum. As a result, they'll need to finance the deal; purchase of your equity may be in one lump sum or may happen over time. Either way, the deal financing could take one of the following forms:

- Borrowings secured against the property

- Vendor finance in which the business lends the money to a buyer

- Business equity loans where the business uses a loan to pay out the departing shareholder

There are a wide range of different financing options, and we have covered a few of the lesser known, here.

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Prepare your successor and yourself

Once the legal red tape has been cleared up, it's important that your successor is properly trained up and has a plan of action they can refer to. This gives them the relevant information on every aspect of your company, so they can learn the essential management tasks that may be second nature to you.

As you prepare to make your own exit, give your successor enough room to learn while you're still in a place to offer advice. It can be difficult to let go, but gradually handing over the reins allows your successor to take ownership when you're ready to leave.

Communicate your succession plan

As with some occasions when a key member of staff leaves, rumours may start to circulate. If things aren't made clear to your employees, there could be misunderstandings. The same can go for your customers too, who have invested a lot of money, time and trust in you over the years. They may take their business elsewhere if they're concerned about the stability of your company.

When your plan is in place, make sure to communicate with your customers and assure them that your successor will provide the same level of service they've come to expect from you.

Closing thoughts

When it comes to succession planning, the key is starting as early as possible, as the process takes a long time to unfold. While planning shouldn’t take forever, it could be years until the business is at a point where you can confidently step away – so it's always better to get a head start.

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